Does Warren Buffett Invest in Index Funds?
Written by
James Holbach
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When it comes to investing, there are generally two ways you can go. There’s active investing, which as the name implies means actively buying and selling stocks in an effort to outperform the overall market. This can take many forms — growth investing, value investing, even more speculative styles like technical analysis and day trading might be considered active investing.
Then there’s passive investing. Passive investors try to do as little as possible, buying and holding a widely diversified portfolio of stocks in an attempt not to beat the market, but to emulate it. The easiest way to pursue passive investing is through the use of what are called index funds, which are mutual funds or exchange-traded funds (ETFs) that model their portfolios after a major index like the S&P 500, which tracks the 500 largest publicly traded companies in the US.
Does Buffett Invest in Index Funds?
Warren Buffett, the legendary investor and billionaire CEO of Berkshire Hathaway, is very obviously not a passive investor. As a hedge fund manager, he acquired Berkshire as a failing textile manufacturer and turned it into one of the biggest and most successful holding companies in the world.
It might surprise you then to learn that Buffett is actually a huge fan of index funds. Berkshire Hathaway even owns shares of a few, although it represents a miniscule portion of the overall portfolio. More importantly, Buffett has consistently recommended that non-professional investors would be best served by investing in low cost index funds — it’s even been reported that his heirs will inherit most of the money he leaves them in the form of index funds.
Do Index Funds Work?
Buffett certainly thinks so, and it’s hard to argue with the Oracle of Omaha, but is there any proof that he’s right about passive investing? While academics in finance have shown that there’s a substantial body of empirical evidence that says yes, one of the best examples comes from Buffett himself.
In 2008, Buffett made a million dollar bet with a hedge fund manager that a passive Vanguard index fund would outperform any five hand picked actively managed investment funds over a period of ten years. The index fund won, and it wasn’t even close – while the five actively managed funds returned 36.3% after fees over the decade, the index fund returned a whopping 125%, all by doing just about nothing.
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